How Do Credit Card Readers Work? The Ultimate Guide

You may already use a card reader every day, but do you know how credit card readers work? Here, we’ll look at the different types of credit card readers, how credit card readers work, and how they can benefit your business.

In an increasingly cashless society, retail store owners need secure ways to get banking information from a customer’s credit or debit card and process it, making credit card readers an important component of your point-of-sale (POS) system. 

A recent study shows that 80% of customers prefer using credit and debit cards to cash. This makes a card reader a smart investment for your retail business, if you haven’t made the switch already.  

On the flip side, you may already use a card reader every day, but do you know how credit card readers work? From the moment your customer swipes or dips their card to the completion of the transaction, information gets sent to the payment processor, the customer’s bank, and then back to your credit card reader. This all happens digitally in a matter of seconds. 

Here, we’ll look at the different types of credit card readers, how credit card readers work, and how they can benefit your business. 

How do credit card readers work? 

Credit card readers work by extracting information from a customer’s credit or debit card, transmitting it to the payment processor, and collecting information from the customer’s bank in return. If the card reader detects available funds, the transaction is approved. 

Simply put, the best card readers take your customer’s payment information, securely communicate the transaction data, and flow the data from the card to the cardholder's bank and back to you to finish the sale. 

Let’s look at the journey the data takes through a card processor, from the customer’s card to final purchase. 

How credit card processing works 

Here’s what happens behind the scenes once a customer wants to make a purchase from your business and scans or dips their credit card, smartphone, or contactless card to pay.

1. Payment authorization. When the customer swipes, dips, or scans their payment method, the data from their card goes to the payment gateway. The payment gateway securely passes the encrypted data between the merchant’s bank and the customer’s bank. The customer’s bank verifies that the customer has enough money to complete the transaction. If the customer has enough money in their account, the bank puts a hold on those funds and marks the transaction as pending.
2. Capture. The credit card company moves funds to the merchant’s bank account. Often, multiple payments are sent at the same time, a process known as batching. 
3. Settlement. Once the funds have fully processed they can be deposited in the merchant’s account. This process may take a few days, depending on your bank and the payment gateway you choose. 

Types of credit card readers

Here we’ll look at the different types of credit card readers and how they work.

Magstripe

A magstripe reader reads the magnetic stripe on credit cards. Credit card companies are phasing out cards that only have a magnetic stripe in favor of EMV chip cards or contactless payments. 

Shopify's Tap & Chip Card Reader that accepts chip and contactless payments.

Magnetic stripe cards are being replaced because they’re more prone to credit card fraud. (A scammer who has a card number can easily duplicate that card.) Chip cards and contactless payments can’t be easily duplicated. 

Chip or EMV readers 

These readers allow your customers to securely use their EMV chip cards. 

What’s EMV? EMV is a global standard developed and managed by major credit card companies. EMV technology enables secure payments in face-to-face and remote environments.

With EMV, a card is inserted or dipped instead of swiped. These cards are more secure than traditional magstripe cards. Your customer can use their PIN or sign for the transaction using this type of card. 

Contactless card readers 

Some credit cards have RFID chips. These chips allow customers to make contactless payments by waving their card near the reader. Let’s take a look at the technology that makes these payments work. 

• NFC. NFC stands for “near field communication.” This technology is integrated into contactless card readers and transmits information a short distance from an RFID chip card. 
• RFID. RFID stands for radio frequency identification. This technology uses radio waves to transmit data over short distances. Customers with this type of chip card can quickly complete their purchase by waving or tapping the card on or near your card reader. (Learn more about RFID in 5 examples of innovative uses for RFID technology in retail).
• Tokenization. Payment tokenization secures payments by taking sensitive banking information and replacing it with non-sensitive information (a token) before processing the payment. With tokenization, criminals who access payment details don’t have the encryption key to read the data.
• Digital wallets. Third-party digital wallets, like Apple Pay, Google Pay, and Amazon Pay, are becoming increasingly popular as a form of contactless payment. These wallets allow you to digitally store various payments in a secure environment and transmit payment through a card reader or a web portal. 

💡 DID YOU KNOW... According to our data, 62% of buyers are now more comfortable making in-store purchases with digital or contactless payments. Get these and other statistics in Shopify's Future of Retail in 2021 report!

These apps are convenient and improve customer wait time—shoppers can wave their smartwatch or phone at the POS system and go.

In a recent Mastercard study, nearly eight in 10 customers reported using contactless payment options during the COVID-19 pandemic. Giving customers the option to check out safely and stay healthy can keep your business competitive.

Benefits of credit card readers for store owners

If you want to accept credit card, debit, or digital wallet payments in your retail store, a credit card reader is a necessity. 

Let’s look at the benefits of a credit card reader for your retail business.

POS apps connect to card readers

Credit card readers with POS apps are very user-friendly. You can process payments from your computer, tablet, and smartphone with the right point-of-sale system. 

Card readers don’t need WiFi

Your customers’ payments will process through the internet, but the card reader itself doesn’t need WiFi to operate. You can use a mobile network, wired internet connection, or WiFi to use a card reader. 

Security

Most customers prefer to process cashless payments, which allows your business to carry less cash. Less cash on hand keeps your business safer when it comes to theft or robberies. It also saves you time going to the bank to make cash deposits and get change.

Credit card readers also keep your business safe online. They securely keep online criminals and hackers away, so sensitive payment information is safe.

Prevent fraud

Today’s card readers use secure processes to move customer data across the internet.  

Card readers use payment tokenization. The data is converted to a secure number, or token, before it’s transmitted through the internet to process the data. This process makes it virtually impossible to hack your transactions. If someone was able to somehow hack the system, the data retrieved would be unusable. Chip card readers also protect your business from accepting a fraudulent card. 

Convenience 

Handling cash and making change takes time. Customers like to have instant gratification. 

Offering customers the option to scan or swipe a credit card or another form of contactless payment provides a frictionless experience. This level of convenience encourages shoppers to come back to your store.

Track and record transactions

Your point of sale software will track all the cards processed through your credit card reader. 

This will save you time if you need to research a transaction for your bookkeeping — for example, if a customer issues a chargeback. You can also allow tips to be processed automatically through Shopify’s POS software to make rewarding your employees simple.

Build trust

Part of your business’ reputation depends on securely handling your customers’ money. Credit card readers encrypt information so sensitive payment data is not compromised. Build trust with your shoppers by keeping their payment details safe.

Stay competitive with credit card readers

If you have a brick-and-mortar store, investing in a credit card reader is vital to stay competitive. 

Giving customers the option to conveniently, quickly, and securely pay for goods and services helps you retain loyal customers. 

Card reader FAQ

What is a card reader?

A card reader is an electronic device that takes debit and credit card payments and automatically submits the transaction to your business bank account.

How do card readers work?

Card readers read debit and credit cards that are inserted into or tapped against the reader in order to take a payment for a purchase.

Do you need WiFi to use a card reader?

No, you don’t necessarily need WiFi for the card reader to work. While you’ll need an internet connection to process the payment, this can also be done via a mobile network or wired internet connection if WiFi isn’t readily available.

Do card readers store data?

Card readers do not typically have any storage space, and instead are just an adapter or device used to take a payment without saving any information.